Capping Carbon Emissions Is Bad, No Matter How You Slice the Revenue

A favorite approach to reducing carbon dioxide emissions among
Washington bureaucrats is the "market-oriented" cap-and-trade
program, which under a global warming bill proposed by
Representatives Henry Waxman (D-CA) and Ed Markey (D-MA), would
establish.

Building broad support for this approach, however, has been
difficult, leading some in Congress to develop alternatives to cap
and trade. Some of these new schemes are as simple as placing a tax
on carbon emissions, while others, such as "cap and dividend" or
"cap and invest" are variations of the original.

The problem with these efforts is that they do not resolve the
central problem that will continue to plague attempts to cap CO2:
All carbon capping plans are costly energy taxes in disguise that
will raise energy prices and unemployment with little environmental
benefit.

Cap and Trade

Under a cap-and-trade program, each power plant, factory,
refinery, and other regulated entity will be allocated allowances
(rights) to emit six greenhouse gases. However, only a certain
percentage of the allowances will be allocated to these entities.
The remaining percentage will be auctioned off or distributed to
other emitting entities. Emitters who reduce their emissions below
their annual allotment can sell their excess allowances to those
who do not. Over time, the cap would be ratcheted down, requiring
greater cuts in emissions and more harm to the economy.

There are plenty of reasons why a cap-and-trade program is a bad
idea, including lack of transparency and potential for fraud and
abuse. But above all it is an economic burden and jobs killer. A
Heritage Foundation analysis of Waxman-Markey found devastating
economic impacts. Specifically, the analysis projects that by 2035
the bill will:

Reduce aggregate gross domestic product (GDP) by $7.4
trillion;

Destroy 844,000 jobs on average, with peak years seeing
unemployment rise by over 1,900,000 jobs, net of any "green jobs"
created;

Raise electricity rates 90 percent after adjusting for
inflation;

Raise inflation-adjusted gasoline prices by 74 percent;

Raise an average family's annual energy bill by $1,500;
and

Increase inflation-adjusted federal debt by 29 percent, or
$33,400 additional federal debt per person, again after adjusting
for inflation.[1]

Although touted as market-oriented, placing an arbitrary limit
on carbon emissions and permits to emit is market-distorting and
attempts to force consumers to change their behavior.

Cap and Dividend

One variant of a cap-and-trade plan is cap and dividend. Just
like a cap-and-trade bill, in cap and dividend businesses would bid
for carbon credits through an auction, but in this scenario,
consumers would receive "dividend payments" from the auction
proceeds.

The architects of cap-and-dividend plans acknowledge that
capping carbon "will inevitably raise the prices of fossil fuels:
coal, oil, and natural gas. The resulting price increases will
reduce the real incomes of American families, striking hardest at
those who can afford it least: lower-income households for whom
fuel costs represent a higher fraction of their expenditures."[2]
Proponents of cap and dividend argue that rebate checks would
offset these costs.

Whether the rebate checks would offset the rise in energy costs
remains to be seen, but this scenario is highly unlikely to help
most Americans. As carbon prices rise, so do the dividend checks,
but so do the energy prices consumers must pay. Further, rebates or
not, the higher energy prices would reduce economic activity by
forcing businesses to cut costs elsewhere, possibly by reducing
their workforce, and thus doing damage that no check would
cover.

A cap on carbon would inflate the price of non-carbon sources of
energy by allowing them into the marketplace at a higher price
point than they otherwise would. Subsidies and special tax breaks
for renewable energy sources along with caps on carbon provide
little incentive for renewable energy source companies to reduce
costs, thereby stifling innovation and leading to more dependency
on government for handouts.

Cap and Invest

Cap and invest is very similar to cap and dividend, but rather
than give money to consumers, it is funneled into government-run
research and development projects for renewable energy
technology.

Rather than giving any money back to the consumers, all the
climate revenue is devoted to unproven renewable technologies. Not
only does this thwart innovation by reducing incentives to make
renewable technologies more economically efficient, but it places
the power to innovate in the hands of bureaucrats. In all sectors
of the economy, history shows that it is the private sector--not
the federal government--that is best at meeting consumer demand and
innovating to provide more efficient products.

The real tragedy is that these energy taxes fall
disproportionately on the poor, since low-income households spend a
larger percentage of their income on energy. A new study found that
the carbon cap in the Lieberman-Warner bill is comparable to a tax
hike for the average American household of $1,100 in 2008, which
would rise to over $1,400 in 2015 and nearly $3,000 in 2050.[3]While
this is without rebates, if no portion of the energy tax revenue is
given back to the consumer in a cap-and-invest plan, the tax
obviously becomes costlier.

Carbon Tax

A carbon tax is a direct, more predictable tax on carbon
emissions, but that does not make it any more acceptable.
Proponents argue that it is better than a cap and trade because it
will not unpredictably fluctuate with the ebbs and flows of the
market as evidenced by Europe's carbon trading problems.[4]

Regardless of the efficiency of a carbon tax, any tax to reduce
carbon dioxide similar to those proposed in cap and trade would
cause significant economic damage and would do very little to
reduce global temperatures. Furthermore, the economic pain of
higher energy prices will reduce disposable income for other goods
and services. Once the economy expands, bureaucrats would likely
raise the tax on businesses, which would ultimately be passed on to
the consumer.

And again, America's poorest would be hit the hardest. Congress
would likely tinker with income tax policy further, making it even
more regressive to compensate while increasing the overall burden
on Americans in the same way Europe has tinkered with its systems
to compensate for the regressive effects of its insidious
value-added tax.[5]

Many proponents of a carbon tax emphasize that the economic
burden would be less if the plan were coupled with a reduction in
the capital gains tax or the payroll tax, but this scenario is
highly unlikely. Although cutting taxes further would encourage
entrepreneurial activity and investment in labor and capital, this
would do little to offset the high energy prices that fall
particularly hard on low-income households.[6] Moreover, it is
clear from Obama's budget blueprint that this regulatory tax regime
is also about raising massive amounts of revenue to fund a huge
expansion in government, specifically health care.

The Climate "Benefit"

There are risks to global warming, but there are also risks to
global warming policies. Even if one of these plans could be
implemented effectively, the impact on global temperatures would be
insignificant. Analysis by the Environmental Protection Agency
shows that if the United States implemented a 60 percent reduction
in CO2 emissions by 2050, the global temperature would be reduced
by 0.1-0.2 degrees Celsius by 2095.[7]

The bottom line is that cap and trade or any variant thereof
would be a drag on the U.S. economy at a time when it can afford it
the least. Moreover, any positive effect on global climate change
would be negligible. In a cost-benefit analysis, the costs of
capping carbon dioxide are large and immediate, but the benefits
are small and remote.

Nicolas
Loris is a Research Assistant and Ben
Lieberman is Senior Policy Analyst in Energy and the
Environment in the Thomas A. Roe Institute for Economic Policy
Studies at The Heritage Foundation.

[2]James K. Boyce and Matthew Riddle, "Cap and
Dividend: How to Curb Global Warming While Protecting the Incomes
of American Families," Political Economy Research Institute
University of Massachusetts, Amherst, November 2007, at /static/reportimages/99E7DDF4B90E57E299F68A1D48C43CCE.pdf
(May 12, 2009).

[3]Bryan Buckley and Sergey Mityakov, "The Cost of
Climate Regulation for American Households," George C. Marshal
Institute, March 2, 2009 at http://www.marshall.org/article.php?id=636
(May 12, 2009). Numbers adjusted for inflation.

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